Make money work

The capital crunch in the market is almost too serious to resolve. The government and the Bank of Korea can release money endlessly but the money won’t necessarily work the way we want it to.

Several times the president has tried to support companies with money but the situation remains the same. Finally, President Lee Myung-bak ordered the chairman of the Financial Supervisory Service in a cabinet meeting to support small and midsized companies.

This is nearly the same as the president ordering the Financial Services Commission and the FSS to put pressure on banks, an act of government intervention in the financial market.

Ordinarily, there is no reason for such intervention and it should be forbidden. But these are not ordinary times. We are in the thick of an emergency due to the financial crisis in the world affecting Korea’s economy. If nothing is done, small and midsized companies will go bankrupt one after another and financial companies including banks will become weak as well.

Something must be done, whether through the administration’s intervention into the financial market or something more dramatic.

But cash doesn’t flow in the markets because of the actions of the government, the FSC and commercial banks. Banks complain they can’t expand mid-term lending as their Bank of International Settlements capital adequacy ratio is falling.

If they tighten the capital flow to insure their survival, even healthy companies will go bankrupt and existing loans will become nonperforming. The BIS ratio would then not be a major concern since every bank will be in dire trouble.

The lukewarm attitude of the government, the FSC and the BOK also makes it more difficult to resolve the credit crunch. They only repeat the president’s orders and no one takes responsibility and steps in. If the BIS ratio becomes a problem they should have prepared measures to complement it.

They also say that the roles of supervising financial institutions, drawing up a financial policy and executing it are divided among different bodies, making it difficult to take effective measures. If needed, a special body must be organized, involving the Blue House, the finance ministry, the BOK, the FSC, the FSS and commercial banks, in order to overcome the crisis. The most urgent task is to make sure that the money goes to where it is really needed.